Congressional Budget Office November 18, 2016 Comparing CBO’s Long-Term Projections With Those of the Social Security Trustees Presentation to the Social Security Advisory Board Julie Topoleski Health, Retirement, and Long-Term Analysis Division This presentation draws on the testimony of Keith Hall, Director, Congressional Budget Office, before the Subcommittee on Social Security, House Committee on Ways and Means, on September 21, 2016, www.cbo.gov/publication/51988, and Congressional Budget Office, The Long-Term Budget Outlook (July 2016), www.cbo.gov/publication/51580.
CBO’s long-term Social Security projections are based on a detailed microsimulation model that starts with data about individuals from a representative sample of the population and projects economic and demographic outcomes for that sample over time. Projections of economic and demographic variables are key inputs into that model. 1 CONGRESSIONAL BUDGET OFFICE
Economic projections are extensions of CBO’s 10-year economic forecast, which underlies the agency’s budget projections. Those economic projections reflect not just historical averages but also trends that many forecasters expect to continue. 2 CONGRESSIONAL BUDGET OFFICE
CBO consults a variety of sources— including our own analysis of historical data, forecasts made by other government agencies, panels of advisors, and academic literature—when creating our projections. We regularly review our projections, sometimes in light of revised and recent data and sometimes in light of recent analyses. 3 CONGRESSIONAL BUDGET OFFICE
CBO’s Projection of the 75-Year Actuarial Balance Is Larger Than the Trustees’ Projection 4 CONGRESSIONAL BUDGET OFFICE
Two-Thirds of the Difference Is Explained by Different Projections of Four Major Inputs 5 CONGRESSIONAL BUDGET OFFICE
The Effect on the 75-Year Actuarial Balance of Adopting Each of the Trustees’ Major Inputs a. The key components of nominal GDP growth are the labor force participation rate, the unemployment rate, the rate of productivity growth, and the inflation rate. b. Other changes include the differences in estimated income taxes paid on Social Security benefits and the interactions among the four major inputs. 6 CONGRESSIONAL BUDGET OFFICE
Like the actuarial balance, outlays and revenues as a percentage of GDP are useful measures of the system’s finances. Over the next 75 years, CBO projects, Social Security’s outlays as a percentage of GDP will be higher, and revenues will be lower, than the Trustees project. 7 CONGRESSIONAL BUDGET OFFICE
Social Security Tax Revenues and Outlays 8 CONGRESSIONAL BUDGET OFFICE
Differences Between CBO’s and the Social Security Trustees’ Projections of Tax Revenues and Outlays in 2090 9 CONGRESSIONAL BUDGET OFFICE
Four Major Inputs That Affect Social Security Projections ■ Earnings subject to Social Security payroll taxes ■ Key components of nominal GDP growth ■ Demographics—fertility, mortality, and immigration ■ Real interest rates 10 CONGRESSIONAL BUDGET OFFICE
Differences Attributable to Earnings Subject to Social Security Payroll Taxes 11 CONGRESSIONAL BUDGET OFFICE
The amount of earnings subject to Social Security payroll taxes, as a percentage of GDP, depends largely on the share of total earnings that is at or below the taxable maximum, the share of total compensation that is paid as earnings, and total compensation as a share of GDP. Differences in the projection of the amount of earnings subject to the payroll tax account for 23 percent of the difference between CBO’s and the Trustees’ projections of the 75-year actuarial balance. 12 CONGRESSIONAL BUDGET OFFICE
Share of Covered Earnings Below Social Security’s Taxable Maximum 13 CONGRESSIONAL BUDGET OFFICE
CBO’s projections of the share of earnings below the maximum taxable amount ($118,500 in 2016) are made on the basis of its projections of the entire distribution of compensation. Those projections reflect an expectation that earnings will grow faster for higher-income people than for others during the next decade—as they have over the past several decades—and at similar rates thereafter. (The projections underlie the agency’s revenue projections.) 14 CONGRESSIONAL BUDGET OFFICE
Share of Wage and Salary Income Earned by the Top 1 Percent of Earners 15 CONGRESSIONAL BUDGET OFFICE
Projections of earnings as a share of compensation reflect trends in the cost of health insurance and incorporate expected responses to future taxes on health insurance. Projections of compensation as a share of GDP reflect the distribution of income among various categories, such as labor income and domestic economic profits. (CBO revisits its projections as part of the development of each baseline forecast; the next revision will occur in January 2017.) 16 CONGRESSIONAL BUDGET OFFICE
Differences Attributable to Key Components of Nominal GDP Growth 17 CONGRESSIONAL BUDGET OFFICE
The size of the economy affects Social Security revenues and spending. When nominal GDP is larger, Social Security receives more revenues initially, and then later—when beneficiaries retire—it pays higher benefits. Larger nominal GDP improves the actuarial balance because earlier years receive greater weight in the calculation of that balance. Differences in the projection of factors affecting nominal GDP account for 22 percent of the difference between CBO’s and the Trustees’ projections of the actuarial balance. 18 CONGRESSIONAL BUDGET OFFICE
Growth of Nominal GDP 19 CONGRESSIONAL BUDGET OFFICE
Four key components affect nominal GDP growth: • Labor force participation rates Unemployment • • Productivity growth • Inflation The most important is labor force participation. 20 CONGRESSIONAL BUDGET OFFICE
Labor Force Participation Rate 21 CONGRESSIONAL BUDGET OFFICE
The Trustees’ projection of GDP growth: • Suggests stronger productivity growth than CBO’s does through the mid-2040s. • Shows faster growth in prices than CBO’s does. 22 CONGRESSIONAL BUDGET OFFICE
The Trustees also project that the unemployment rate will stabilize at a rate significantly above the current rate. In contrast, CBO projects that it will stay roughly unchanged. (This slightly offsets other factors that make the Trustees’ projection of nominal GDP higher than CBO’s.) 23 CONGRESSIONAL BUDGET OFFICE
Differences Attributable to Demographics 24 CONGRESSIONAL BUDGET OFFICE
Demographics also affect Social Security projections. The size of the labor force, which is related to the number of adults between the ages of 20 and 64, affects Social Security revenues. Social Security outlays are closely linked to the size of the population age 65 or older. Differences in demographics account for 15 percent of the difference between the Trustees’ and CBO’s projections of the 75-year actuarial balance. 25 CONGRESSIONAL BUDGET OFFICE
Increase in Population of Different Age Groups 26 CONGRESSIONAL BUDGET OFFICE
These differences reflect different estimates of three factors: fertility, immigration, and mortality. In the Trustees’ projections: The total fertility rate is higher than in • CBO’s projections • The net rate of immigration is lower • The mortality rate declines slightly more slowly 27 CONGRESSIONAL BUDGET OFFICE
Differences Attributable to Real Interest Rates 28 CONGRESSIONAL BUDGET OFFICE
Interest rates affect measures of the system’s finances in two ways. First, they determine interest on balances in the trust funds. Second, in the calculation of the actuarial balance, they are used to compute present values of future cash flows. A higher interest rate improves the actuarial balance. 29 CONGRESSIONAL BUDGET OFFICE
In the Trustees’ projections, the average interest rate on special-issue bonds held in the trust fund is used as the discount rate. That rate is higher in the long run than CBO projects. Differences in the projections of the interest rate account for 6 percent of the difference between the Trustees’ and CBO’s projections of the 75-year actuarial balance. 30 CONGRESSIONAL BUDGET OFFICE
Real Interest Rate Used to Calculate the 75-Year Actuarial Balance 31 CONGRESSIONAL BUDGET OFFICE
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